Rating Agencies' Credibility Once Again At Stake As Pakistan Is Upgraded

Yet their reputation revived subsequently, and they remain the gold standard for investors to determine the financial viability of both corporates and countries. This is why the latest upgrades given by Standard & Poor's (S&P) Global and Moody’s to India and Pakistan, respectively, assume importance. 

In the case of India, S&P Global Ratings revised the country’s long-term sovereign credit rating after a prolonged gap of 18 years, upgrading it from BBB- to BBB, with a stable outlook. But they also raised Pakistan’s rating from CCC+ to B-. No comparison with India, but from New Delhi, the move raises questions.

Why No AAA Cookie Yet?

S&P's rating of India indicates the economy can meet its financial commitments, but remains vulnerable to adverse economic conditions in the long run. Such sensitivity separates it from those in the higher AAA rating level. The short-term rating has also been raised, from A3 to A2, which implies a similar outlook for the immediate future.

The upgrade is welcome as it will bring down the cost of overseas borrowings. It will also ensure easier flow of capital into the country at a time when growth needs to be sped up. Though GDP growth has been projected to reach 6.5 per cent in the current fiscal, an emerging economy like India needs to aim for a higher level of 8-9 per cent annually, to achieve the aim of becoming a developed nation. 

The timing of the upgrade by the rating agency assumes considerable significance. It has been done at a juncture of widespread concern over the economic outlook, following the 50 per cent tariff threat by Donald Trump.

S&P has not only downplayed the impact of the heavy tariffs but also commended the present government’s economic management, including the fiscal consolidation process. It expects the effects of US tariffs on the economy to be “manageable”, with sound economic fundamentals underpinning the growth momentum over the next 2-3 years. 

Describing the Indian economy as among the best performing in the world, the agency has recalled India's remarkable comeback from the pandemic, with real GDP growth at 8.8 per cent from 2022 to 2024.

Such praise is bound to come as balm to the government, coming as it does soon after Trump dismissed India and Russia as “dead economies”. In a sharp rebuttal to such comments, S&P has projected a healthy growth rate of 6.8 per cent in the medium term for this country.

A History Of Resilience, Unrewarded

While the upgrade is all to the good, the reason for the rating agency waiting for so long to do so is intriguing, to say the least. It must be recalled that India was able to withstand the devastation of the 2008 global financial crisis in a far better manner than others in Asia.

The reason then, as with the recent tariff issue, was the greater domestic orientation of the economy. Yet, the rating agency had not moved the needle till now, even though India has had the tag of the fastest-growing major economy for the past several years.

It was also able to weather not just the pandemic, but also the effects of geopolitical turmoil in 2022, with greater resilience than many developed economies. The US and Europe both took a long time to cope with the high inflation and spike in energy costs as a result of the Russia-Ukraine war.

In contrast, India was able to weather the storm and contained inflationary pressures much more rapidly while dealing with the impact of the disruption in global supply chains. Rating agencies like S&P should thus have brought India into the higher investment grade much earlier than now.

Pakistan's Upgrade, A Curious Case

Another interesting move has been Moody’s upgrade of its credit rating to Pakistan, which follows earlier upticks by S&P and Fitch. It raised the country’s credit rating by one notch, bringing it from Caa2 to Caa1. Both ratings are low, indicating high credit risk, but the higher level indicates a lesser risk of default. 

The agency attributed the upgrade to Pakistan’s improving external position due to reforms mandated as a result of the US$ 7 billion loan under the IMF Extended Fund Facility, although it added that the rating also reflected the country’s weak governance and high degree of political uncertainty.

There is no doubt that inflationary pressures on the economy have eased, while foreign exchange reserves have gone up, ever since the loan was approved last year. But the economy remains highly fragile, which is mentioned by Moody’s in its report. 

The improvement in Pakistan’s credit rating seems to have been done without waiting for the economy to achieve greater stability in the wake of reforms launched last year. The haste in the upgrade appears unusual, given the inordinately long time to do so in the case of India.

This, although the Indian economy has demonstrated the ability to deal with external headwinds without slowing the pace of growth over the past two decades. Yet, the rating agencies failed to give credit to India on this score till now.

While the upgrade must be welcomed, as it will reduce the cost of foreign capital, questions remain over the prolonged delay in taking this step.